Shutterfly announces fourth quarter and full year 2017 financial results

REDWOOD CITY, Calif.–(BUSINESS WIRE)–Shutterfly, Inc. (NASDAQ:SFLY), the leading online retailer and manufacturer of high-quality personalized products and services, today announced financial results for the fourth quarter and full year ended December 31, 2017.

Christopher North, CEO, Shutterfly

“Q4 was a strong conclusion to a year in which we made significant strides in positioning Shutterfly for long-term, profitable growth,” said Christopher North, President and Chief Executive Officer. “I’m proud of the effort from the Shutterfly team which has allowed us to bring our customers together on a single consumer platform, re-focusing on Shutterfly and Tiny Prints, our two strongest Consumer brands. We exceeded the high-end of guidance on all major metrics thanks to organic growth in the Shutterfly brand, good retention of customers and revenues from legacy websites, accelerating mobile growth, overperformance by Shutterfly Business Solutions, and continued expense control.”

North continued, “At the same time, today we announced a definitive agreement to acquire Lifetouch, the leader in school photography. Lifetouch is a strong strategic fit, bringing significant synergies while adding scale and profitability. With this acquisition and continued growth in our existing Shutterfly business, we are targeting a minimum of $450 million of Adjusted EBITDA by 2020.” Please see our separate press release announcing Shutterfly’s definitive agreement to acquire privately-held Lifetouch.

Fourth Quarter 2017 Financial Highlights

Net revenues totaled $593.8 million, a 6% year-over-year increase. Consumer net revenues totaled $521.8 million, flat year-over-year which were better than anticipated, as growth in the Shutterfly brand was offset by loss of revenue from the three websites we shut down. Shutterfly Business Solutions net revenues totaled $71.9 million, an 81% year-over-year increase.

GAAP Operating income totaled $179.0 million, a $25.2 million or 16% year-over-year increase. Net income was $111.7 million or $3.37 per share. Adjusted EBITDA was $215.6 million, a $20.8 million or 11% year-over-year increase.

On a proforma basis, which excludes a benefit from tax reform of $8.9 million, Net income was $102.8 million, an increase of $11.9 million or 13%, and Earnings per share increased $0.48 per share to $3.11 per share.

During the fourth quarter of 2017, we repurchased a total of 660 thousand shares for $30.0 million bringing our year-to-date repurchases to over 2.3 million shares and total share repurchases for 2017 to $110.0 million.

GAAP Operating income totaled $61.6 million and Net income was $30.1 million or $0.88 per share.

On a proforma basis, our operating income was $86.7 million[1], a $37.6 million or a 76% year-over-year increase. Adjusted EBITDA was $234.1 million[2], a $25.6 million or 12% year-over-year increase and Net income was $35.8 million[2], a $19.9 million or 125% year-over-year increase. Earnings per share increased $0.60 per share to $1.05 per share.

[1] Normalized for restructuring charges of $17.0 million and capital lease termination charges of $8.1 million[2] Refer to page 14 for reconciliation of GAAP net income to Non-GAAP net income and reconciliation of GAAP net income to Non-GAAP Adjusted EBITDA.

Business Outlook[1]

Full Year 2018:

Net revenues to range from $1,220.0 million to $1,260.0 million

Consumer revenue to range from $1,020.0 million to $1,050.0 million

We anticipate mid-to-high single digit Shutterfly brand growth will be offset by lost revenue from the three websites we shut down

We expect Consumer revenue to increase throughout the year. We expect a mid-single digit Consumer decline in the first half of 2018, a return to modest growth in the third quarter of 2018, and high-single digit growth in the fourth quarter of 2018, our first, true like-for-like comparable period

SBS revenue to range from $200.0 million to $210.0 million

Gross profit margin to range from 48.5% to 49.5% of net revenues

Operating income to range from $115.0 million to $135.0 million

Effective tax rate of 26.0%

Net income per share to range from $1.94 to $2.38

Weighted average shares of approximately 33.9 million

Adjusted EBITDA to range from $260.0 million to $280.0 million

Capital expenditures to be approximately $65.0 million

First Quarter 2018:

Net revenues to range from $190.0 million to $194.0 million

Consumer net revenue expected to decline mid-single digits over the first quarter of 2017

Gross profit margin to range from 38.0% to 38.5% of net revenues

Operating loss to range from $34.0 million to $32.0 million

Effective tax rate of 26.0%

Net loss per share to range from $0.96 to $0.92

Weighted average shares of approximately 32.5 million

Adjusted EBITDA to range from $3.0 million to $5.0 million

[1]Excludes Lifetouch and acquisition-related expenses.

Notes to the Fourth Quarter 2017 Financial Results and Operating Metrics and 2018 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization, stock-based compensation, capital lease termination, and restructuring.

Adjusted EBITDA minus capital expenditures is a non-GAAP financial measure that the Company defines as adjusted EBITDA less purchases of property, plant, and equipment and capitalization of software development costs.

Free cash flow is a non-GAAP financial measure that the Company defines as cash provided by operating activities less capital expenditures.

Consumer segment includes net revenues from cards and stationery, professionally-bound photo books, home décor, personalized gifts, high quality prints, and other photo-based merchandise, and the related shipping revenues as well as rental revenue from the BorrowLenses brand. Consumer also includes net revenues from advertising displayed in the Company’s website.

Shutterfly Business Solutions (SBS) includes net revenues generated from the printing and shipping of marketing and variable data print products and formats.

Average Order Value (AOV) is defined as total net revenues (excluding SBS) divided by total orders.

The foregoing financial guidance replaces any of the Company’s previously issued financial guidance which should no longer be relied upon.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading online retailer and manufacturer of high-quality personalized products and services. Founded in 1999, the Shutterfly, Inc. brands includes Shutterfly, where your photos come to life in photo books, gifts, and cards and stationery – with premium offerings in its Tiny Prints boutique – as well as wedding invitations and stationery for every step of the planning process; BorrowLenses, the premier online marketplace for photographic and video equipment rentals; and GrooveBook, an iPhone and Android app and subscription service that prints up to 100 mobile phone photos in a GrooveBook and mails it to customers every month. For more information about Shutterfly, Inc. (SFLY), visit www.shutterflyinc.com.

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

88,946

93,531

Amortization of intangible assets

14,916

20,120

Amortization of debt discount and issuance costs

15,508

14,432

Stock-based compensation

43,573

45,692

Loss on disposal of property and equipment

1,141

738

Deferred income taxes

(161

)

8,899

Tax benefit from stock-based compensation

—

290

Excess tax benefits from stock-based compensation

—

(2,413

)

Restructuring

10,882

—

Changes in operating assets and liabilities:

Accounts receivable

(24,952

)

(2,142

)

Inventories

(743

)

1,715

Prepaid expenses and other assets

5,603

(19,140

)

Accounts payable

32,189

27,128

Accrued and other liabilities

22,537

(11,333

)

Net cash provided by operating activities

239,524

193,423

Cash flows from investing activities:

Purchases of property and equipment

(36,745

)

(56,264

)

Capitalization of software and website development costs

(34,006

)

(33,423

)

Purchases of investments

(205,466

)

(29,422

)

Proceeds from the maturities of investments

45,257

28,234

Proceeds from the sales of investments

13,874

12,213

Proceeds from sale of property and equipment

21,724

14,261

Net cash used in investing activities

(195,362

)

(64,401

)

Cash flows from financing activities:

Proceeds from issuance of common stock upon exercise of stock options

677

2,104

Repurchases of common stock

(110,000

)

(112,488

)

Excess tax benefits from stock-based compensation

—

2,413

Principal payments of capital lease and financing obligations

(29,380

)

(19,377

)

Payment for contingent consideration liabilities

—

(1,313

)

Proceeds from borrowings, net of issuance costs

295,211

—

Net cash provided by (used in) financing activities

156,508

(128,661

)

Net increase in cash and cash equivalents

200,670

361

Cash and cash equivalents, beginning of period

289,224

288,863

Cash and cash equivalents, end of period

$

489,894

$

289,224

Supplemental schedule of non-cash investing / financing activities:

Net increase (decrease) in accrued purchases of property and equipment

$

2,693

$

(4,013

)

Net decrease in accrued capitalized software and website development costs

(396

)

(319

)

Stock-based compensation capitalized with software and website development costs

1,373

1,560

Property and equipment acquired under capital leases

19,145

23,946

Shutterfly, Inc.

Consumer Metrics Disclosure

(Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2017

2016

2017

2016

Consumer Metrics

Customers [1]

6,110,833

6,219,011

10,048,431

10,115,763

year-over-year change

(2

)%

(1

)%

Orders

10,463,752

10,869,499

26,328,121

27,108,889

year-over-year change

(4

)%

(3

)%

Average order value [2]

$49.87

$47.98

$37.87

$36.80

year-over-year change

4

%

3

%

[1] An active customer is defined as one that has transacted in the last trailing twelve months.

[2] Average order value excludes Shutterfly Business Solutions revenue.

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2017

2016

2017

2016

Consumer

Net revenues

$

521,809

$

521,484

$

996,963

$

997,556

Cost of net revenues

193,320

198,949

456,665

455,387

Restructuring

—

—

1,475

—

Gross profit

$

328,489

$

322,535

$

538,823

$

542,169

Consumer gross profit margin

63.0

%

61.8

%

54.0

%

54.3

%

Shutterfly Business Solutions (SBS)

Net revenues

$

71,946

$

39,742

$

193,239

$

136,668

Cost of net revenues

58,812

28,673

154,068

100,582

Gross profit

$

13,134

$

11,069

$

39,171

$

36,086

SBS gross profit margin

18.3

%

27.9

%

20.3

%

26.4

%

Corporate [1]

Net revenues

$

—

$

—

$

—

$

—

Cost of net revenues

2,086

2,426

8,917

10,148

Gross profit

$

(2,086

)

$

(2,426

)

$

(8,917

)

$

(10,148

)

Consolidated

Net revenues

$

593,755

$

561,226

$

1,190,202

$

1,134,224

Cost of net revenues

254,218

230,048

619,650

566,117

Restructuring

—

—

1,475

—

Gross profit

$

339,537

$

331,178

$

569,077

$

568,107

Gross profit margin

57.2

%

59.0

%

47.8

%

50.1

%

Gross profit margin excluding restructuring

57.2

%

59.0

%

47.9

%

50.1

%

[1] Corporate category includes activities that are not directly attributable or allocable to a specific segment. This category consists of stock-based compensation and amortization of intangible assets.

Shutterfly, Inc.

Consumer Revenues by Brand

(In thousands)

(Unaudited)

Three Months Ended

Year Ended

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Dec. 31,

Dec. 31,

2016

2016

2016

2016

2017

2017

2017

2017

2016

2017

Consumer net revenues

Shutterfly brand

$

114,407

$

133,387

$

111,035

$

404,101

$

123,903

$

139,908

$

115,883

$

464,547

$

762,930

$

844,242

Tiny Prints Boutique

—

—

—

—

—

—

1,942

48,932

—

50,874

Tiny Prints [1]

12,202

14,757

7,963

93,635

10,465

12,917

—

—

128,557

23,382

Wedding Paper Divas [2]

16,407

14,642

11,423

8,957

14,290

11,365

8,523

—

51,429

34,178

MyPublisher [3]

4,980

4,538

4,413

6,561

4,936

6,056

—

—

20,492

10,992

Other

7,385

9,293

9,240

8,230

7,051

8,844

9,070

8,330

34,148

33,295

Total

$

155,381

$

176,617

$

144,074

$

521,484

$

160,645

$

179,090

$

135,418

$

521,809

$

997,556

$

996,963

[1] Tiny Prints website shut down on June 28, 2017.

[2] Wedding Paper Divas website shut down on September 13, 2017.

[3] MyPublisher website shut down on May 15, 2017.

Shutterfly, Inc.

Restructuring

(In thousands)

(Unaudited)

Twelve Months Ended

December 31, 2017

Restructuring:

Property and equipment

$

8,414

Employee costs

5,851

Inventory

1,475

Other costs

1,226

Total

$

16,966

There were no restructuring charges for the three months ended December 31, 2017.

Shutterfly, Inc.

Reconciliation of Net Income (Loss) to Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per Share

[1] In the second quarter of 2016, the Company acquired and immediately sold $9.8 million of printers.

[2]The Company reclassified an immaterial contingent consideration payment (to Groovebook Founders) in the first quarter of 2016 between operating and financing activities within the cash flow statement.

Shutterfly, Inc.

Reconciliation of GAAP Operating Cash Flow to Free Cash Flow

(In thousands)

(Unaudited)

Year Ended

2017

2016

2015

Net cash provided by operating activities

$

239,524

$

193,423

$

165,037

Less: capital expenditures[1]

70,751

79,860

76,669

Free cash flow

$

168,773

$

113,563

$

88,368

% Growth over prior year

49

%

29

%

[1] Excludes purchase of printers of $9.8 million that the Company acquired and immediately sold during the second quarter of 2016.

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